Moody's cuts rating to A on Colorado school district bonds before large issuance.

DALLAS - With a major bond sale planned today, Moody's Investors Service this week downgraded the Jefferson County, Colo., School District to A from A1.

The agency cited the weakened finances of the state's largest school system. "The main concern we've had was their financial position," said Ditmar Kopf, assistant vice president at Moody's. "They have a low level of [fund] reserves for several years now."

He said the district has been averaging a 2% general fund reserve, noting that between 1981 and 1991 its fund balance has slipped from $6.5 million to a $21 million deficit. Moody's also cited major deferred or future capital needs that must be funded.

Announced late Monday, the downgrade to A from A1 is the second reduction for Jefferson County since 1984, when Moody's dropped the district's Aa rating. Standard & Poor's Corp. rates the district's outstanding debt AA.

A syndicate led by George K. Baum & Co. today plans to price a $325 million tax-backed debt sale that was approved by voters earlier this month. Colorado issuers are rushing deals to market before the Nov. 3 election, fearing that a proposed tax and spending limit on government could be approved.

As of late yesterday, plans called for the district to sell $154.75 million of serials maturing 1994 through 2007; $132.11 million of terms due 2011; and $38.15 million of terms due 2012.

Alex Brown, a senior vice president at George K. Baum, said the downgrade is not likely to affect the sale, since the issue is expected to be insured by AMBAC Indemnity Corp. The fee for insurance was under 30 basis points, he said.

The Moody's downgrade was not a surprise for Jefferson County, which has the state's largest enrollment with 81,700 students, he said, adding, "They had expressed some concerns over the financial performance."

Still, the action marks the fifth downgrade in the past 12 months of a Colorado school district and the third in October. Brown sees the rating cuts as a recognition by analysts of the role of state funding in running Colorado schools.

"This is an unfortunate trend in the state, and what Moody's has seen is increasing pressure on schools." he said, adding that they have been dependent on uncertain state aid in recent years.

At the same time, some cities have been upgraded because the strong economic rebound has triggered growth in sales taxes - the major revenue for local government.

"Some of them are seeing a 6 or 7% increase [in sales taxes] because of the economy," Brown said.

While Moody's does not forecast future ratings actions, Kopf said the outcome of the Nov. 3 election on a proposal that would increase the state sales tax by a percentage point to fund public education could help Colorado schools now drawing down on their reserves.

If voters reject the measure, he said, "it's just unclear at this time what impact that could have on ratings. "